Net present value and internal rate of return

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Reference no: EM132725998

Natural Mosaic Company (U.S.) is considering investing Rs 70,000,000 in India to create a wholly owned tile manufacturing plant to export to the European market. After three years the subsidiary would be sold to Indian investors for Rs. 100,000,000. A pro forma income statement for the Indian operation predicts net income after tax of Rs 7,500,000 including depreciation expense of Rs 1,000,000, thus generating Rs 8,500,000 annual cash flow.

The initial investment will be made on December 31, 2020, and cash flows will occur on December 31st of each succeeding year. Annual cash dividends to Natural Mosaic from India will equal 80% of accounting income. The current exchange rate is Rs 50 per USD; but the dollar is expected to appreciate against rupee by 5% per year. The U.S. corporate tax rate is 30% and the Indian corporate tax rate is 40%. Because the Indian tax rate is greater than the U.S. tax rate, annual dividends paid to Natural Mosaic will not be subject to additional taxes in the United States. There are no capital gains taxes on the final sale. Natural Mosaic uses a weighted average cost of capital of 15% on domestic investments, but will add 5 percentage points for the Indian investment because of perceived greater risk.

What is the net present value and internal rate of return on this investment?

Reference no: EM132725998

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